Family feud at Harbor Freight

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A family feud over the ownership and control of Harbor Freight Tools, the multichannel discount tool retailer with more than 300 stores, is now taking place in Superior Court of Los Angeles County. The father-son struggle for control, laid out in a complaint filed on July 14 by company founder Allan Smidt, is in many ways a familiar tale of cross-generational disagreements over management, growth and lifestyles.

Headquartered in Camarillo, Calif., the retailer sells imported tools, most of them house brands, through catalog, over the Internet and in nationwide outlets. Smidt, 81, who founded the company (under another name) in 1968, has accused his son Eric, 50, of pressuring him to transfer over the ownership of Harbor Freight Tools and then freezing him out of the company.

The company has estimated annual sales of about $1 billion.

Eric Smidt has served as CEO of Harbor Freight Tools since 1999. Allan and Dorothy Smidt, 76, are now suing their only child for breach of trust, breach of contract false representations and other causes. In addition to damages, the plaintiffs are requesting that the court rescind the agreement that transferred ownership of Harbor Freight to Eric Smidt in June 1999.

At the time, working relations between father and son were good, according to court papers. The two agreed to a complicated purchase agreement involving the sale of a controlling interest in the company for $20.9 million. According to the elder Smidt, he sold his stock in the company for less than fair market value at the suggestion of his son, who agreed they would continue to run the company together, with Allan serving as chairman of the board, and the family would share the profits together.

But changes began the following year, many of which the elder Smidt opposed. In 2007, when Harbor Freight borrowed $500 million from Credit Suisse First Boston, Allan Smidt accused his son of using some of the money as “dividends” to pay for a $46 million dollar estate in Beverly Hills, a $100 million addition to his art collection and a $20 million apartment in Manhattan.

“The leveraging of the companies has had serious negative consequences,” the complaint reads.

That same year, Eric agreed to pay his father $50 million, in annual payments of $2.5 million, for the rest of his life, according to the lawsuit. At least two payments have been missed, Allan Smidt claims.

Another sticking point between father and son is the termination and replacement of many of Harbor Freight’s long-standing management team in 2009 and 2010. An attempt was also made in April 2010 to remove Allan Smidt as a director of Harbor Freight, the complaint states. When Smidt went to the company’s headquarters on May 17, 2010, and tried to access payroll, inventory and supplier records through his office computer, he was unable to do so. Smidt says he was then escorted out of the building by the company’s chief operating office, Robert Rene, who said, “Don’t come back.”

Eric Smidt has yet to file any legal response to his father’s complaint. But he issued the following statement to Home Channel News:

“While the lawsuit saddens me, the assertions in the complaint are completely unfounded and will be addressed in due course. The lawsuit will have no affect on the continued success of Harbor Freight Tools, which has just completed its strongest fiscal year ever.”